Slowly, the Shopping Center Industry is Striding Toward Recovery

ATLANTA —When Gar Herring, president and CEO of Dallas-based developer The MGHerring Group asked a luncheon crowd at the Southeast Conference of the International Council of Shopping Centers (ICSC) on Tuesday if they thought the recession was over, an overwhelming majority of hundreds of attendees raised their hands to show they feel it isn’t over yet.

Just a year ago, commentators were comparing the U.S. economy to that of the Great Depression of the 1930s, Herring said, but despite the prevailing sentiment that shopping center developers, owners and managers are still enduring hard times, there are a number of signs that the industry is improving.

Same-store sales rose in the first nine months of 2010 on a year-over-year basis by 3.4%, according to ICSC, said Herring, who is vice president of the group’s Southern division. And ICSC forecasts that holiday retail sales will increase by 3- to 3.5% over 2009 levels, the largest spike since 2006.

“Conditions are improving, albeit slowly,” says Herring. “We can draw encouragement from the fact that retailers and shopping center operators have responded creatively to the many challenges thrown their way since the dark months of 2009.”

Shopping center professionals and brokers have put their leasing, management and marketing skills to “the sternest imaginable test,” and now shoppers are returning and traffic is up at the retail centers, says Herring. “Retailers have generally shifted from a position of having to mark down a glut of excess inventory to selling at full price.”

However, the retail tide is not yet lifting all boats. The discount sector remains strong and the luxury segment of the industry has been strengthening, but the middle market has been slower to rebound.

Discounter Dollar General plans to expand its 9,100 stores by another 1,200 within two years. Fast food retailer Burger King plans to add 500 stores, while Quiznos will add 1,200.

As jobs and consumer spending lead to greater sales and profits for retailers, and renewed demand for store space in malls and shopping centers, retail leasing is expected to strengthen further.

Occupancy perks up

The number of properties with occupancy below 80%, the tipping point for severe distress, declined in the third quarter compared with fourth-quarter 2009, according to the CoStar Group. However, among community shopping centers, the number of properties with occupancy of less than 80% is still increasing somewhat, as is the number of regional malls with high vacancies.

Still, the number of power, lifestyle and strip centers with occupancy below 80% has declined since late 2009.

The 12.9 million sq. ft. absorbed in the 62 largest U.S. retail markets in the third quarter demonstrate the fifth consecutive quarter of positive absorption since 2009, when the market recorded 26.7 million sq. ft. in negative absorption, ICSC reports.

“As long as the recovery continues in the broader economy and the amount of new supply delivered remains low, retail vacancy rates should continue to decline through mid-2013,” says Herring.

Meanwhile, rents are still declining but at a slower rate, and falling vacancies and shrinking supply are expected to gradually shift the imbalance between supply and demand and lift retail rental rates and sale prices.

‘Bust’ markets struggle

The national retail vacancy rate edged down slightly from 7.4% at midyear to 7.3% in the third quarter, although the availability rate — space that's being marketed but is not yet vacant — is still hovering around a peak of 10%.

Some retail markets have fared better than others. In Texas, where the housing crisis did not cause as much economic harm as in other states, retail leasing and occupancy have remained stronger than in “residential bust” markets like California, Florida, Nevada and Arizona, says Herring.

In Denver and Atlanta, where retail space overhangs are a problem, recovery may take longer than in markets such as those in Texas.

What will it take for the industry to recover? Restraint, when it comes to expansion, for one thing. And new ideas. “Getting our shopping centers back to full strength will, in many cases, happen because of the growth of new retail concepts,” says Herring.

“Retail chains that over-saturated prior to the global financial crises, and have been forced to cut back their store portfolios, are not likely to simply return to the kind of freewheeling expansion of the old days.”